City Reinventions

By Robert Bach, Director of Research – Americas, Newmark Grubb Knight Frank

Recently, I traveled to Pittsburgh to meet with an offshore investor who, like all commercial property investors these days, is looking for product and, potentially, new cities to search for said product. Pittsburgh is enjoying a buzz among investors, thanks to its resilient economy anchored by education and healthcare, its newfound status as an energy market tapping into the Marcellus and Utica shale formations, and its lack of speculative construction. This offshore investor spoke of Pittsburgh in the same breath as Austin, Seattle and other ascending markets that are performing in a global spotlight.

Pittsburgh is the latest city to reinvent itself, and it won’t be the last. (Are you listening, Detroit?) Successful cities tie into the dynamism of the American and global economies, using their advantages to build business clusters with good long-term growth prospects. The process can take decades, and sometimes it’s as much a matter of luck as planning. Who envisioned a decade ago that new drilling technologies would initiate an era of oil and natural gas production in the U.S. that could lead to energy self-sufficiency? A decade ago, Pittsburgh was portrayed as a shrinking city struggling to retain its young, college-educated population. Now the population is growing and the labor market is expanding, with new jobs and new workers to fill them.

Pittsburgh is not growing rapidly, but in a market without speculative construction, it doesn’t take much to support rent growth. If cities were financial assets, Pittsburgh, with its muted highs and lows, would perform more like a bond or dividend-paying stock than a growth stock – potentially a good market in a portfolio to hedge against the risk in more volatile markets.

This takes us back to the offshore investor in search of product. The problem with Pittsburgh and other secondary markets is that the supply of suitable investment product is limited. These markets are not as liquid as their larger, flashier counterparts on the coasts, nor are their local economies as diverse. If the market relies heavily on a major employer or industry, investors would be making a more concentrated bet than they might realize, and the exit strategy could be more tenuous. Air connections are another factor to consider. Airlines have cut back service to many secondary markets, making them less attractive for business expansions and for property investors. Formerly a US Airways hub, Pittsburgh’s airport is noticeably quieter than it was a few years ago.

Everyone has their favorite secondary markets, based on where they feel comfortable, word-of-mouth or, better yet, an analytical comparison. A few of mine, based on their recent performance and long-term prospects, are Portland; Salt Lake City; Nashville; Minneapolis-St. Paul; Indianapolis; Columbus, Ohio; Grand Rapids, Mich.; and Tampa-St. Petersburg.